October 2009

US REAL ESTATE: Around the houses

The US property crisis is far from over, but resourceful investors are finding new opportunities to invest, successfully, discovers Nick Fitzpatrick
us_house.jpgUS real estate is a tough market, but asset managers are finding opportunities through funds and physical property investment – even in the desert.

Las Vegas-based Land Baron Investments, which invests money for pension funds, endowments and other investors, has launched a $255m (€174m) Western States Distressed Land Fund aimed at pension funds and high-net-worth investors.

The fund takes advantage of a short-lived period in which homebuilders can sell finished lots that are ready to be built on at discount prices in return for tax breaks. Land Baron then resells the lots a year and a day later back to developers at a profit, but for a price that allows the developers to compete in the re-sale market.

“We buy for 30 cents on the dollar and sell for 60 cents. The developer gets the property back at a 40% discount which allows them to compete with the re-sale market,” says Mike Chernine, managing partner.

The fund targets a 25-50% yield.

About 60% of the fund will concentrate on land in Nevada, Arizona, Idaho and Utah that is earmarked for housing. The additional money will focus on commercial property sites that are ready for development but were seized by banks.

Home values in the West are down to pre-boom levels. Chernine says the median value for a Las Vegas home was $340,000 in 2006, but is now $130,000.

But he notes that eight of the twelve national homebuilders have seen stock increases this year. They have sold off a lot of toxic assets and have become more liquid as the current inventory of lots is absorbed.

Property securities
This was mirrored by a rise in the US real estate investment trusts (Reits) market. The North American Reit Equity Index was capitalised at $231bn, as at Friday 18 September.

Reits have attracted large inflows of new equity capital in recent months, says Alan Supple, European portfolio manager for Philadelphia-based Urdang Capital Management. Urdang invests in direct property in the US and in Reits globally. Its client base is 98% institutional.

The money raised by Reits, says Supple, has put them in a good position to capitalise on the stress in the private equity market, where more than $300bn of leveraged loans to real estate companies is due to roll over by 2012.

Dean Frankel, head of Urdang’s North American securities product, says: “A number of public companies will take market share from private companies, especially in the office sector.

“Reits now have the capital to spend on tenant improvements and acquisitions of companies that can add value.”

The recapitalisation of Reits could be seen as a reward for tighter controls by public companies over their leverage.

Steve Shigekawa, a co-manager of the US Real Estate Securities Fund at Neuberger Berman, adds: “Generally, public companies have had less leverage than private companies.”

He continues: “I think people continue to see negative headlines about commercial real estate yet do not realise that  50 public real estate companies have been able to access over $16bn of equity funding so far this year. This is continuing today.”

Shigekawa’s fund has $75m of assets under management and invests in Reits and real estate operating companies. The fund focuses on commercial real estate securities covering apartments, retail, industrial and office units. A Ucits fund with the same strategy is marketed in Europe and has around $20m of assets.

He points out that non-US institutions appear comfortable with investing in open-ended real estate securities in US mutual funds.

George Ochs, a managing director within the global real estate assets team at JP Morgan Asset Management, says: “In Europe there are closed-end funds in Italian or German housing where a single investor will only get a sliver. In the US there are a large number of open-ended funds in one vehicle, which are diversified. We think the trend is towards more of these.”

Jay Davis, a managing director at Principal Real Estate Investors, says the firm has 180 institutional clients including some of the largest US pension plans and clients from Europe.

Dutch investors have invested in the US for many decades, he says, initially with direct investments but more recently through funds. Tax hurdles to direct investment drove the change. The appetite of investors right now is defensive, says Davis.

“They are looking for well-leased, stabilised assets in major markets. This could be office space in Boston, New York and Washington.”

He adds that in the retail sector Principal’s focus is on grocers and “drug-anchored” retailers, while malls will be under pressure. 

In the industrial sector he believes ports in New Jersey, Los Angeles, Houston and elsewhere will do well on the back of global trade.

Principal also manages $6bn of commercial mortgage-backed securities (CMBS). “This business is slow, but we are still buying high-quality and high-grade CMBS because spreads are still attractive.

“If you can understand the underlying real estate we think there are good opportunities. The market may be closed, but it will come back one day, even if in a different bottle.”

©2009 funds europe

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